The euro lives on conditions which it cannot guarantee itself. This was already clear when the Economic and Monetary Union was established. Some predicted that monetary union would lead to political disunity. This was tested during the Great Financial Crisis showing that monetary union creates considerable political constraints. However, critics underestimated the existing constitutional framework and the political resolve to use the means within and outside the Treaties to overcome the Great Financial Crisis. This contribution explores the expansive force of monetary policy and how it collides with neighbouring policy areas, creating tensions for which the Treaties are ill equipped. The European Central Bank is at the centre of recent evolutions. Compared to the initial vision of a central bank which mainly pursues financial stability, the new ECB now also contributes to attaining budgetary stability and financial stability within the limits of the Treaties.
This chapter analyses the institutional and legal framework governing the ECB’s responsibility in monetary policy, banking supervision and resolution. The discussion raises issues concerning the primacy of monetary policy and the price stability mandate of article 127 (1) TFEU and how this can be reconciled with the ECB’s support for the Union’s general economic policies (so-called secondary objectives) and for the discharge of its other responsibilities, including banking supervision, within the Banking Union.
Within the Economic and Monetary Union (EMU) the responsibility for monetary policy lies with the European Central Bank (ECB). EMU was designed without a fiscal counterpart to the ECB that could assist monetary policy with stabilizing the euro area economy. This paper reviews how euro area governments could cooperate to establish fiscal framework conditions in support of monetary policy that are similar to those found in other currency areas. First, they could create a central fiscal capacity to ensure a euro area economic policy stance that is consistent with the orientation of monetary policy. Second, member countries could introduce a safe sovereign asset for the eurozone to anchor financial integration, secure an even monetary transmission, and facilitate the implementation of monetary policy. Third, euro area governments could commit when necessary to recapitalize their national central bank and (indirectly) the ECB to underpin the credibility of large balance-sheet operations.
Central banks are often said to have a natural interest in financial stability. However, financial stability as such does not occupy a prominent place in the ECB’s Treaty mandate. To address this puzzle, the chapter analyses the extent to which financial stability is, or has since the crisis become, a part of the mandate of the ECB, both in law and in practice. Drawing on economic and legal discussions we show the lack of clarity as to the precise meaning of financial stability. We argue that going beyond the Treaty articles and looking closer at ECB’s recent operation provides a more accurate picture of the role that financial stability plays in its mandate. We analyse how the concept was relevant in the deployment of the various central bank instruments identified by Padoa-Schioppa (monetary policy strategy, crisis management, payment system operation). Our findings confirm the relevance of financial stability has significantly increased for the ECB, albeit in a differentiated manner